Here is where we’re going to do a little math. Just a little bit.
You’ve probably heard of the terms “pips,” “pipettes,” and “lots” thrown around, and now we’re going to explain what they are and show you how their values are calculated.
Take your time with this information, as it is required knowledge for all forex traders.
Don’t even think about trading until you are comfortable with pip values and calculating profit and loss.
The unit of measurement to express the change in value between two currencies is called a “pip.” If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is ONE PIP.
A pip is usually the last decimal place of a price quote.
Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs (they go out to two decimal places). For example, for EUR/USD, it is 0.0001, and for USD/JPY, it is 0.01.
As each currency has its own relative value, it’s necessary to calculate the value of a pip for that particular currency pair.
In the following example, we will use a quote with 4 decimal places.
For the purpose of better explaining the calculations, exchange rates will be expressed as a ratio (i.e., EUR/USD at 1.2500 will be written as “1 EUR / 1.2500 USD”)